The FOMC met today, cut 25 basis points, and changed very little of the statement. Powell’s press conference was slightly dovish. Here is what stood out to me:

1. About higher Treasury yields. When asked about rising Treasury yields (a couple times), Powell said it was about stronger economics. In response to a question from Nick Timiraos of the Wall Street Journal about higher yields, he said,

We’ve watched the run-up in bond rates and it is nowhere near where it was, of course, a year ago. I guess, the long-run rates are well below that level. So, we are watching that. Things have been moving around and we will see where they settle. I think it is too early to really say where they settle. Ultimately, I’m sure we’ve all read these decompositions of what, you know, and I certainly have but it is not our job to provide our specific decomposition. I will say though, that it appears that the moves are not principally about higher inflation expectations, they are really about a sense of a stronger likelihood of stronger growth, and perhaps less in the sense of downside risks.”

Then,

Let’s talk about the data we’ve gotten since the last meeting. So, in the main, the economic activity data have been stronger than expected. The NIPA revision was stronger. Certainly, the September employment report was stronger. The October report, not stronger. Retail Sales, stronger. So, overall though, I think you take away a sense of some of the downside risks to economic activity having been diminished; with the NIPA revisions in particular. And so, overall feeling good about economic activity. So, I think we would factor that in. At the same time, we got one inflation report which was, it wasn’t terrible, but it was a little higher than expected.

“Bond market vigilantes” are a political statement tacked onto every move higher in yields. The media can’t get enough of this theme but they somehow only exist when economic data is really good and disappear immediately when economic data turns around.

2. About higher inflation. He acknowledged that inflation has been higher but that the overall direction is lower and isn’t bothered by this recent bump.

3. About the new Administration’s threats to Fed independence. He sternly answered two questions about what a Trump presidency would mean for the Fed. He was asked if he would step down if asked to from the new administration. He simply said, “no” and turned to the next question. When asked if the President could demote governors, he said “not permitted under the law” and turned to the next question. He clearly doesn’t want to entertain the wilder ideas of what a Trump presidency could mean for the Fed.

4. About cutting in December. Powell went to great lengths to say no decision has been made about what the committee will do in December but reaffirmed their easing bias. He stated that the Fed is going back to neutral, but doesn’t know how fast, or exactly where neutral is. The most important sentence I heard at this press conference was, “As we approach rates that are plausibly neutral, slower cuts may be appropriate”. This sounds to me like he wants to cut every meeting until they are closer to neutral. The bond market is priced for it to take longer (end of 2025 to 3.625%). I’ve modeled what Powell’s implications for interest cuts would be for the 2-year yield. I conclude that the 2-year is about 11 basis points cheap (high) to Powell’s implication (table below.)

We will hear from the rest of the committee through speeches and interviews in coming days and weeks to see if their view is different than Powell’s, but his resolve to continue lowering rates was strong. I ultimately expect bigger economic forces will drive interest rates, but in the meantime, unless inflation surprises to be hotter again, the 2-year yield cannot get much higher.